The case against South Coast Air Quality Management District alleges that the air-pollution control agency issued invalid emission credits to businesses and public facilities.

A federal district judge will hear arguments today over whether an air-pollution control agency issued invalid emission credits to businesses and public facilities in one of California's most polluted regions.

The case against South Coast Air Quality Management District -- the air pollution control agency for Orange County and parts of Los Angeles, Riverside and San Bernardino counties -- was brought by four environmental groups, including the Natural Resources Defense Council, which argue that credits issued by the district over the last 19 years violate Clean Air Act provisions.

The AQMD has come under fire for its credit system before. In July 2008, a judge ruled that it could not sell credits to power plants without first doing a more thorough environmental analysis. In November, a judge in a separate case temporarily revoked an AQMD rule that had allowed the district to issue credits to public-service facilities and private businesses that produce less than four tons of emissions each year. The AQMD was ordered to undertake an environmental review of the practice.

Now environmentalists want a ruling on whether such a credit system can be used in any circumstance.

The district has argued that its program allows businesses to upgrade and modernize equipment without having to purchase credits on the market, where they can cost millions of dollars. Without the AQMD credits, hundreds of businesses have been unable to install equipment, some of which is meant to lower emissions, said Sam Atwood, AQMD spokesman.

"You have hundreds of businesses and public facilities whose plans to replace aging equipment, expand or modernize have come to a screeching halt for an indefinite period," Atwood said.

The district recently met with 200 business representatives from Southern California to discuss the credit freeze that is putting many of their projects in limbo.

In areas where pollution levels do not meet federal air quality standards, federal law requires developers building or modifying their facilities to first obtain emission-reduction credits, or offsets, from facilities that are shutting down or that emit less than federal limits. The credits are meant to allow a region to develop industrially without increasing its net amount of air pollution.

The district had collected credits from shut-down facilities and distributed them free to public facilities such as schools, hospitals and sewage treatment plants, as well as to private businesses that produced less than four tons of emissions each year.

Because of the moratorium on the credits, the Los Angeles County Sanitation District has postponed plans to replace old boilers at its Palos Verdes landfill with a fuel-cell battery, which would be a lower-emission way to convert landfill methane gas into electricity, said Greg Adams, assistant departmental engineer at the sanitation district. The $1.8-million market price for credits has halted the project, Adams said.

"You'd think everyone would jump on board with this overall emission-lowering system," he said. "But we can't build the new, cleaner system without having credits. So we continue to operate the older, dirtier power plant like we did before, to nobody's benefit."

Adams added that many of the 3,500 gas stations in the four-county area are vying for permits to install tighter controls on their gas nozzles that would better prevent gasoline vapors from escaping into the air. As a result, the stations will continue operating with their existing systems and ultimately contribute to worsening air quality in the region, he said.

But the environmental groups suing AQMD say the district should not be distributing credits that it cannot prove were collected in a valid way. The credits introduced "unlawful pollution" into the South Coast basin, the suit alleged. The Clean Air Act requires that such credits be "real, surplus, enforceable, quantifiable and permanent."

David Pettit, attorney for the Natural Resources Defense Council, said his organization and the other plaintiffs want to stop what he calls the "misuse of credits" to allow more-polluting power plants and refineries in the South Coast basin, and help the district figure out how many legitimate credits it has.

"We're trying to clean up the district's books, to try to make sure those credits are dealt with consistently with the Clean Air Act," Pettit said.